Understand Crypto Borrowing and Lending In a Way You Can Even Explain it to a Kid
When it comes to crypto, lending and borrowing is a whole different ball game. What is it and how can you get started? Read on to find out!
What if someone told you that you can get paid in fiat to borrow funds against your crypto without actually selling your crypto? It may sound too good to be true, but it’s a possibility in the crypto world! You can essentially borrow against your Bitcoin or any other crypto assets portfolio. This means that you can borrow funds without having to sell your crypto, and at the same time paying negligible to no interest. You use your crypto assets as collateral, and the platform avails you with a Line-of-Credit (LoC) that can be used to withdraw funds in fiat.
Is Borrowing Against Your Crypto Safe?
The total global cryptocurrency market is currently at is $879 Billion. According to DeFi Pulse, a platform that tracks the Total Value Locked (TVL) in the smart contracts of popular DeFi applications. Furthermore, a major share of DeFi’s value belongs to crypto lending.
The space is not limited to borrowing. You can also leverage your crypto on the platform to earn interest on your portfolio. It can serve as a safe and proven method to earn passive income without risking liquidation of your portfolio. But how does this exactly work, are there any hidden fees, and is it really as safe as it sounds? Let’s take a closer look.
How Crypto Lending and Borrowing Works?
Crypto Lending
Crypto lending refers to the process of lending your crypto assets to a platform to earn fixed and stable interest called “crypto dividends” on your assets. ByteX with its motto Trade, Borrow & Earn against digital assets specialize in crypto lending and acts as an aggregator between the borrower and the lender.
To help you put this into perspective:
Let’s say that you own 20 Bitcoins that are idle in your wallet or on any crypto exchange. You can then lend these Bitcoins on ByteX and earn interest or APY in return. On the other end of the spectrum, you can use your lent funds as a collateral to borrow funds in crypto or fiat as well.
ByteX offers up to 18% APR, which is relatively high compared to other platforms. For the above scenario you will earn 1.8 BTC in interest payments every year on lending 20 Bitcoins and in theory doubling your BTCs within 4 years! If you want to withdraw your funds sooner, you can do so at any time without any penalties.
Crypto Borrowing
With crypto borrowing, you essentially borrow money from a platform like ByteX, using your crypto assets as collateral. For example, let’s say that you wish to borrow against Bitcoin, and the platform offers a loan-to-value ratio of 2:1. This means that you can borrow $500 in USDT for every $1000 worth of Bitcoin as a collateral. So, if you have 10 Bitcoins worth $400,000, you can borrow up to $200,000 USDT.
At the same time, the platform will also charge you a small fee for borrowing the money. This is usually around 0.5% to 2% of the loan amount.
If you’re looking to borrow against crypto assets, it’s important to consider the following factors:
- The Loan-To-Value (LTV) ratio: This ratio refers to the amount of money that you can borrow for every crypto asset that you put up as collateral. Crypto loans usually have low LTV ratios due to the volatility of the market.
- The interest rate: This is the fee that you will have to pay for borrowing the money.
- The platform fee: This is the fee charged by the platform for lending you the money.
The Process
Crypto lending and borrowing platforms work on the principle of LTV and Line-of-Credit (LoC). Here’s a step-by-step guide on how it works:
- The borrower creates an account on the ByteX platform and puts up a collateral.
- Based on the collateral, the credit line is made available to the borrower. The credit line is calculated on the over-collateralized basis.
- The credit line can be used by the borrower to withdraw funds
- The borrower has to maintain credit line to avoid funds from dissolving
- Now, on the platform, the lenders will automatically fund the loan and receive regular interest as payments.
- Once the borrower has completed the repayment of the loan and the interest, the borrower can take back the crypto collateral.
Must Know Before You Dive In Borrowing & Lending
Traditional borrowing and lending always comes with the risk of the borrower defaulting on the loan. To solve this problem, ByteX uses a Line-of-Credit (LoC) to provide loans against your collateral. In scenarios, where the value of collateral decreases or the borrower defaults on the repayment, collateral assets are used to repay to the lender. This ensures that the lenders are always paid in every scenario.
At the same time, if you are borrowing crypto, there is always the risk that the value of your collateral will decrease due to the volatile crypto market. So, if the price of Bitcoin falls by 10%, and you have put up Bitcoin as collateral, you will need to increase your collateral by 10% or make the sufficient repayment to maintain your LTV ratio to avoid loss of your collateral.
For example, let’s say that you borrow $200,000 USDT against 10 Bitcoins when each Bitcoin is worth $40,000. The value of Bitcoin drops to $20,000. In this case, your collateral is now only worth $100,000, which is less than the amount you borrowed. So you would have to either put up more collateral or repay the loan early.
There’s also the risk of platform default. This is when the lending platform itself defaults on its obligations to the lenders and borrowers. To safeguard users and ensure no such scenario can occur with ByteX, the platform is insured with BitGo for $100M and audited by Certik.
The Bottom Line
Cryptocurrency is evidently becoming a popular option for payments, but it is also an excellent opportunity for investments. For investors, it is a great way to earn interest on their digital assets and for borrowers, it is a way to get access to cash flow without having to sell their crypto holdings.
ByteX is a crypto borrowing platform that offers up to 18% APR on your cryptos and loans at 50% LTV, backed by your cryptos. ByteX also offers spot trade and staking features to maximize your earnings.
To learn more, sign up with ByteX today and connect with us! We don’t Byte(X).
